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Bitcoin was the best-performing currency of 2016

The world’s most high-profile digital currency, bitcoin, hit a three-year high this week, rising above US$1,000 on Monday in a strong surge that saw it stand out as the best-performing currency of 2016.

Bitcoin, which shot up 125 percent in value last year alone, is now fast approaching its all-time high of $1,163 in late 2013, and stands at $1,027.53 at time of writing per price index CoinDesk.

While the extreme gains – which many expect to continue – make bitcoin look like an attractive bet, some investors are wary of the currency’s history of extreme volatility.

In 2013, the cryptocurrency – which relies on encrypted peer-to-peer transactions between users – saw a rapid ten-fold increase in its value in the space of two months, and then lost much of it in a series of crashes, reaching as low as $200–300 during early 2015, before making its way back up again.

In more recent times, bitcoin has been much more stable, and commentators say its 2016 gains could be a result of a weakening Chinese yuan – which fell 7 percent in value last year, its weakest performance in more than two decades.

Unlike traditional currencies such as the US dollar that are sponsored by a nation’s central bank, bitcoin is completely decentralised – and its anonymity means it’s easier to move it between countries than conventional, regulated currencies.

This also means it’s popular for making payments on the dark web, where it helps make transactions possible for all kinds of illicit products and services – including illegal drugs, weaponry, and much more.

But despite this infamy by association – and bitcoin’s historic ups and downs – the digital currency’s strong gains in 2016 show that there’s huge demand for it and its flexibility in the mainstream too.